NBR Transcripts August 7, 2008
Thursday, August 07, 2008Citigroup's Auction-Rate Security Buy Back
SUZANNE PRATT: A major victory tonight for investors -- two big investment banks have agreed to buy back huge holdings of auction-rate securities, investments that were touted as safe but weren't. Late today, Merrill Lynch voluntarily announced it would repurchase $12 billion of those holdings, starting early next year. This morning, Citigroup agreed to buy back its auction-rate securities as part of a legal settlement with regulators. The nation's largest bank, Citi, will repurchase $7.5 billion in ARS' from small business customers, individuals and charities. It will also help institutional customers unload $12 billion of the securities and it will pay a $100 million fine. As Scott Gurvey reports, Citi was the first Wall Street firm to settle claims over how the securities were sold.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Once again, it is the state of New York which has extracted a price from Wall Street for alleged violations of the public trust. Attorney General Andrew Cuomo says Citigroup global markets misled investors to get them to purchase auction- rate securities, known as ARS.
ANDREW CUOMO, NEW YORK ATTORNEY GENERAL: Remember the theory behind the auction-rate securities -- it was the equivalent of cash, it was liquid. So if you were a conservative investor, you tended to buy these securities, because you didn't want to lock up your money for a long period of time.
GURVEY: The securities were created to give short-term investors the benefit of higher returns, which usually go to those willing to tie-up their funds for longer periods of time. But the meltdown of the mortgage market changed the environment. In the resulting credit crunch, the securities could no longer be sold because no one wanted to participate in the weekly or monthly auctions which set their price. The Securities and Exchange Commission participated in today's agreement, which is expected to set a pattern for agreements with other Wall Street firms. SEC enforcement chief Linda Thomsen says civil penalties against those firms are still an option.
LINDA CHATMAN THOMSEN, DIRECTOR, DIVISION OF ENFORCEMENT, SEC: It is our hope that the prospect of a penalty will make compliance with these terms and getting investors whole a real priority.
GURVEY: In 2002, then-New York Attorney General Eliot Spitzer accused investment banks of misleading investors through biased analyst recommendations designed to aid underwriting clients. The settlement in that case cost Wall Street $1.5 billion; cleaning up the ARS mess could cost more. Attorney Jacob Zamansky represents both individual and institutional holders of auction-rate securities.
JACOB ZAMANSKY, SECURITIES ATTORNEY, ZAMANSKY & ASSOCIATES: Citigroup got off easy. They paid $100 million fine. They bought back the auction- rate securities, but they did not admit to wrongdoing. That's significant. Also, no heads have rolled. The people that were responsible, no one's been punished.
GURVEY: Citi says the $100 million fine it will pay will not have a material impact on its bottom line. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
The Gas Crisis Is Fueling Slow Retail Sales
SUZANNE PRATT: Discounters continue to dominate the retail picture. July same store sales were weak as consumers spent cautiously and the stimulus checks dried up. Sales at the nation's largest retailer, Wal-Mart, rose 3 percent in July, but that was just shy of analyst expectations. Rival Target posted a wider than expected sales drop of just over 1 percent. Discount warehouse clubs like Costco and BJ's Wholesale had double-digit sales gains. But clothing retailers and department stores were hit hard. Sales at Gap fell 11 percent. JCPenney and Kohl's both reported bigger-than-expected drops in sales. A little later in the program, we'll talk about back to school and holiday selling seasons with retail analyst Brian Tunick of JPMorgan. Joining me now for a discussion of those chain store numbers and with his outlook for the retail sector is Brian Tunick. He is a specialty retail analyst at JPMorgan. Brian, welcome.
BRIAN TUNICK, RETAIL ANALYST, JPMORGAN: How are you doing?
PRATT: Let's talk about the July numbers first. What did you make of them?
TUNICK: I mean, I think coming after the June stimulus numbers, which were very strong, I think July was pretty disappointing. But for most of our company, July is more of a clearance month, so it's not exactly the month you want to have good numbers, but I think any signs that people can find about the consumer, they're looking at. And July was the low plan. The good news that the margins were better isn't enough for the stocks right now. There's a lot of fear out there that we're going to continue to decelerate early into 2009.
PRATT: So what does it tell you about back to school? Should we expect to see a sort of grim season there?
TUNICK: Yeah. I think you're seeing the stocks starting to anticipate that. I think a lot of the companies themselves I think are starting to plan. I mean we could see probably one of the worst back to schools in what we think could be 15 years. It's going to be really ugly. It's just a question of how much defense or lean inventories our companies can really plan at. You are not planning to be the hero right now. There's not a lot of dollars being spent. So really it's defense, it's inventory management and it's SG&A expense control right now.
PRATT: Do you expect the trend that we've been seeing in the retail sector of discounters benefiting and everybody else suffering to continue for the foreseeable future?
TUNICK: Yeah, unfortunately. So far in 2008 just the number of bankruptcies that we've seen so far hitting the specialty retail store closings or apparel or discounters is the highest we've seen in 10 years. So if that continues, there's no question there's going to be a lot of inventory benefiting the off-pricers like the TJX's or the Ross Stores of the world and it's probably not a great thing for the specialty retailers that have to compete with those going out of business sale events.
PRATT: So what does this all mean for the holiday season? Is this likely to be as you say about back to school? It's going to be one of the worst holiday seasons that we've seen for awhile as well?
TUNICK: Yeah. I think in the beginning of the year, there was a lot of hope that either the Fed cuts or the stimulus or the fact that this is an election year and the fact that we're facing some easy comparisons from a disappointing holiday last year, would result in some good numbers. But I think these last couple of weeks out there there's been a big change in expectation and I think this is going to be one of the worst holiday seasons from a top line sales growth perspective that we've seen in over 10 years. We're hoping it's not as bad as back to 1991. But basically if the trend continues and the consumer has to feel all of the pressures about energy and food, worrying about their assets both in home and in the stock market. And now we're obviously seeing the employment. It's going to take a lot more than a presidential election I think to give people some confidence. So, it's shaping up so far with this momentum to be ugly and the south side of Wall Street is still looking for 20 percent earnings growth for the back half and almost 20 percent earnings growth for next year. So that's not good. Stocks can't seem to discount all the bad news quite yet.
PRATT: It doesn't sound to me that you would be recommending that investors wade in at any point in to this sector at all.
TUNICK: Yeah, I mean, you really want to have over a 12 to 24 month time horizon to want to buy these stocks. For clients that may be just want to trade falling (ph) oil, maybe they'll get a little balance. But I still think earnings expectations are too high. There's too much uncertainty right now and if you have a three to six-month time horizon, unfortunately I think you're going to still want to stay away. At least let's start talking about holiday and first half of '09 before we have any idea for bottoming. And we've had a great four or five year wealth effect that unfortunately is unraveling right now.
PRATT: OK, I think we have to leave it there. Thank you for joining us this evening.
TUNICK: OK.
PRATT: My guest this evening, Brian Tunick of JPMorgan.
"Green Options"-Shedding Light On LED
SUZANNE PRATT: From your car to your cell phone to the streets of your city, there's a dazzling technology gaining ground. It's the super- bright light emitting diode, more commonly known as LED lighting. These semiconductors stand to transform just about every device that uses light. In tonight's "Green Options," Lucy Craft kicks off a two-part look at the energy efficient lights that have sparked a $4 billion industry.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Cool-running, thin, versatile, shock-resistant and highly energy-efficient, LEDs are transforming the world of lighting, which in the U.S. consumes about a fifth of all electricity used. Especially in an era of energy anxiety, it's high time to mothball the 100-year-old incandescent light says Yves Lacroix, who runs a Shikoku startup which makes LED manufacturing equipment.
YVES LACROIX, PRESIDENT, Y SYSTEMS: Until now, the incandescent lamp, when you plug it in, you get a heater (INAUDIBLE) and OK, you can see the heater. But it's not really -- you're not plugging - (INAUDIBLE) heat and it's so hot that you can see it. So in an LED, when you plug it in, what comes out is only light.
CRAFT: At Nichia Corporation, which makes one third of the high-end LEDs sold worldwide, manager Takashi Sakamoto says the LEDs offer a raft of advantages over conventional lighting.
TRANSLATION OF: TAKASHI SAKAMOTO, MANAGER, LED BUSINESS, NICHIA CORP.: LEDs are long-lasting -- 50,000 hours, compared to just thousands for incandescents. They never burn out, but just gradually fade. LEDs are also small and light and very durable. Under normal use, they are virtually unbreakable.
CRAFT: A startup called Nitride Semiconductors is pioneering the market for ultraviolet LEDs, used in machines to check for counterfeit currency. President Yoshiko Muramoto says sturdy and compact UV LEDs could replace bulky UV lamps used to sterilize water in developing countries.
YOSHIHIKO MURAMOTO, PRES., NITRIDE SEMICONDUCTORS: (INAUDIBLE) LED. So market is very huge.
CRAFT: While LEDs are starting to sideline incandescents in the commercial sector, it may be decades before LEDs wipe out fluorescent lights. Toshinari Kori, a spokesman for the Tokushima state government, which is promoting LEDs, says the devices will have to drop in price by half in order to be cost-effective.
TRANSLATION OF: TOSHINARI KORI, SPOKESMAN, TOKUSHIMA DEPT. OF COMMERCE, INDUSTRY & LABOR: We have saved a little energy by using LEDs instead of fluorescents. Unlike fluorescents, LEDs are mercury-free and better for the environment. But there is no cost benefit. Fluorescent lights cost just $10, but an LED light runs $400.
CRAFT: Still, the versatility of LEDs goes beyond mere function. Across town at another Tokushima startup, which designs light shows, founder Katsutoshi Oguri experiments with a homemade Swarovski chandelier. Gone are the usual masses of wiring, because all electricity flows through the modules themselves.
TRANSLATION OF: KATSUTOSHI OGURI, CEO, LIGHTING ENVIRONMENT DESIGN CORP.: You could make something like this with regular lights, but it wouldn't be this lightweight and use so little energy. And if we used regular lights, the heat would melt the housing. These lights run cool, so it doesn't harm the acrylic cover.
CRAFT: The LED modules can be as easily snapped together as Legos. Brightness and color can be programmed via software.
OGURI: With regular lights, it would be impossible to alter colors and control the show from a computer program the way we do with LEDs. There are lots more possibilities; we just have to figure out what they are.
CRAFT: Experts say LEDs will eventually make the conventional light bulb obsolete as the candle. But LEDs won't just replace old-fashioned technology. They will change the very definition of illumination in ways that Thomas Edison could never have dreamed of. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokushima, Japan.
"Commentary"-Bridging the Computer Generation Gap
SUZANNE PRATT: Tonight's commentator says, when choosing computer systems and technologies, companies need to balance the needs of both younger and older workers. He's Robert Morison, executive vice president and director of research at Ngenera Corporation.
ROBERT MORISON, EXEC. VP & DIR OF RESEARCH, NGENERA CORP.: We've done a lot of research on the young generation entering the workforce and how their abilities, attitudes and behaviors challenge the status quo in most corporations. Case in point is how they use technology. Young employees like up-to-date, multi-purpose, stylish devices like the iPhone. They expect to connect with people, find information and do their computing anytime and anyplace. They rely on instant messaging and facebook and believe you can collaborate without benefit of meetings. They judge prospective employers by their computing practices and they use technology to bounce back and forth between work and play. Now look at corporate computing. The company issues you the year before last technology, configured to permit you to do what the company thinks you should be doing. Access to information is limited to those with a predetermined need to know. IM and facebook are at best tolerated, more often banned. Collaboration has to be planned and work and play don't mix. Let's face it, the corporate computing experience is inferior to what people have at home and many of its restrictions are obsolete and unproductive. What's a corporation to do? It cannot ignore or beat back the preferences of the next wave of employees. It also cannot ignore the fact that many young people are naive about the basics of information management, intellectual property and corporate exposure. Employers have little choice but to revamp their approaches to employee computing, embrace the technologies of collaboration and simultaneously accommodate and educate their young employees. I'm Robert Morison.
Remembering Michael Metz of Oppenheimer
PAUL KANGAS: Finally tonight, Wall Street has lost a well-respected veteran and NIGHTLY BUSINESS REPORT has lost a friend. Michael Metz, chief investment strategist at Oppenheimer, died last night. Metz had been one of my Friday "Market Monitor" guests for more than two decades. In fact, I last caught up with him back in February. Metz was known on the Street for having the courage of his convictions. He wasn't afraid to call things as he saw them, even if it meant he ran opposite the crowd and he had the experience to make those calls: Metz started his Wall Street career as an analyst with Standard & Poor's back in 1959. Suzanne, he was one of a kind and we shall miss him.
PRATT: And Paul, he was one of my favorite, favorite bears. I will definitely miss him.
Paul Kangas' Stocks in the News
PAUL KANGAS: Those rather tepid July retail sales set a bearish tone for Wall Street this morning, as did a rebound in oil prices and last night's huge loss reported by AIG. In a steady sell-off, the Dow fell to a 139- point loss by noontime, but the NASDAQ Index fell just a modest 7 points. A stronger than expected rise in pending home sales stabilized stocks for a few hours, but news this afternoon that U.S. consumers took on $14 billion in debt in June sent the market tumbling to the day's lowest level by the final bell. The Dow Industrial Average closed off 224.64 points at 11,431.43. The NASDAQ Composite lost 22.64 to 2,355.73. Standard & Poor's 500 down 23.12 ending at 1,266.07. In the bond market, the 10-year note gained 35/32 to par and 19/32, lowering the yield to 3.93 percent.
Big board volume leader was SprintNextel (S) moving up $0.45 after losing $1.21 yesterday after it reported a second quarter loss of $0.12 a share, but today it canceled an offering of $3 billion in convertible preferred stock. That was a plus.
American Intl Group (AIG) plunging $5.25. That accounted for 42 points of the Dow's loss. After the close yesterday, the company reported a huge net loss in the second quarter of $2.06 a share.
Citigroup (C) down $1.23. As you heard, it's going to be doing (ph) $7 billion of auction-rate securities.
Bank of America (BAC) in the same boat, down $1.93.
Wells Fargo (WFC) fell $1.30.
Washington Mutual (WM) fell $0.33.
Wachovia (WB) down $1.29.
General Electric (GE) a $0.43 loss.
JPMorgan Chase (JPM) off $1.58.
And then came Pfizer (PFE), tenth in volume, down $0.22.
Wal-Mart Stores (WMT) plunging $3.80. That accounted for 31 points of the Dow's loss and as you heard, its July same store sales were a bit lower than expected and the guidance was not particularly bullish.
JC Penny (JCP) however did well, up $1.93. The company boosted its second quarter earnings guidance from $0.38 to $0.50 to $0.52 a share on better than expected sales coming along and cost cuts are helping also.
Abercrombie & Fitch ( ANF) down $5.93. Its July same store sales were down 7 percent.
Brookdale Senior Living (BKD) up $2.63. The company reported a second quarter loss of $0.03, nowhere near as bad as the $0.18 loss last year. The Street was looking for a loss of $0.32, so much better than expected.
OM Group (OMG) up $5.46. Second quarter earnings $1.85, up from last year's $1.52 and the company has an upbeat outlook.
Apparel maker Warnaco Group (WRC) up $4.04. Second quarter operating earnings jumped to $0.71 from only $0.46 last year and revenues were up 22 percent. Standard & Poor's upgraded the stock from "hold" to a "buy."
Emergent Biosolutions (EBS) plunging $3.35. Second quarter earnings of $0.06 versus a loss of $0.17 a share last year, but the Street was looking for earnings of $0.23.
And also on the downside, King Pharmaceuticals (KG) losing $2.14. Second quarter earnings came in at $0.18, down from $0.26 last year and the company's (INAUDIBLE) blood pressure drug is getting some tough generic competition.
NASDAQ's most active, Apple (AAPL) down $0.62.
Intel (INTC) an $0.87 gain.
Research in Motion (RIMM) dropped a nickel a share.
Microsoft (MSFT) up $0.37.
And Cisco Systems (CSCO) $0.35 loss there.
Google (GOOG) was down $7.22.
Oracle (ORCL) fell $0.11.
Qualcomm (QCOM) an $0.18 drop.
baidu.com (BIDU) backing down $11.18.
And then Amgen (AMGN) off $1.45.
Verisign (VRSN) fell $4.31. This is an Internet switchboard manufacturer. Second quarter loss of $0.35 versus a loss of only $0.02 a year ago. That's due in part to restructuring claims in this period.
And then Noble International (NOBL) up $2.21, big gain there. The automotive products maker had second quarter earnings jump to $0.35 from only $0.13 a year ago. Sales jumped 72 percent. The Street was actually looking for a loss of $0.07 a share, so much better than expected.
Those are the stocks in the news tonight.
